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Project Risk Black Swans
Adrian Clements
General Manager Operational Risk Management
BSc (Hons) Chem Eng, CFIRM, SMAIChE, MIIRSM
+352 4792 2314
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Overview
• We are looking to opportunities
• We have some risks
• But cant capture the opportunities due to unknown unknowns
• Its not new
• Change the way to see…
• …With support from you
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2Copyright © ArcelorMittal 23/06/2017
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The opportunities
3
• Memory foam
• Freeze-dried food
• Firefighting equipment
• Emergency "space blankets",
• Dustbusters
• Cochlear implants
• Speedo's LZR Racer swimsuits.
• Gigapixel Images
• LED’s
• Sensors Enable Plants to Text Message Farmers
• Artificial limbs
• Invisible braces-Invisible braces are a type of transparent
ceramics called translucent polycrystalline alumina (TPA).
• Scratch-resistant lenses
• Water purification
• NASA claims that there are over 1650 other spin-offs in the
fields of computer technology, environment and agriculture,
health and medicine, public safety, transportation, recreation,
and industrial productivity.
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Whats the difference between Risk and
Opportunity?
Risk Management Opportunity Management
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The opportunity process -
similar to the project management process
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So how to capture
opportunities? How to make the
opportunity work?×
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What is moving/driving projects forward?
And making them fail!
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Elemental drivers• Shareholders
• Short term but should be long term• Market
• CFO
• Positive• Over confidence• Cognitive Bias
• Solving short term problems with no
long term view
• Flexible• Dynamic
• Short term but operated long term
• Reduce• Control• Fund
• Short term
• Start now• Fast results
• Reduce hot or cold test
• Short term
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The world today
UnknownUnknowns
Risks
Unknowns
ExpectationsDemographic
Dynamics
Speed of Change
Dynamics
Unknowns
Misalignment
Objectives
KPI’s
•Funding
•Customers
•Laws
•Specification
•Knowledge loss
•Experience driven by “Cheap”
•Language and meaning
•Cost
•Timing
•Excessive stakeholder involvement
•Default settings
•Project leadership
•Multi use of funds
•Contingency risk
•Packages
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Is it all new?
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Lets take ArcelorMittal as an example
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• Multiple projects
• Internal and external project management
• Multiple countries
• Similar suppliers
• Same issues
Country risks
HR skill sets
Critical set points
P&ID’s
Supply chain issues
Process Control
Interface management
P&ID’s
Supply chain issues
Political Risk
Visa implementation
Startup / shutdown
Supply chain issues
Process Control
Procedures
Hazops
Lessons learnt
Package interface
Set Points
Interface alignment
Creep
?
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Between 2007 and 2016, IAC & CEO Office approved/reapproved 1372 projects for a total amount of $35.2b
Overview 2007-2016
11(Projects approved includes phases of a project that were approved by IAC)
Strictly Confidential
5,339
640
6,078
1,199
41
6,781
40
1,561
7,878
2,711 2,926
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
ACIS AMDS BRAZIL China CORPORATE FCE HSC LCE Mining NAFTA USA
FA amount approved by segment (period 2007-2016, in M$)
On average 150 projects per year and $4 bn
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Project dynamics are basically the same
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The boundaries
change
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Who is the owner of the project?
Market expectation
of value creation
Market expectation
of value creation
• Quarterly results
CFO is face to the marketCFO is face
to the market
• Are the finances under control
• financial strength for dividends
• Effective use of capital
KPIKPI• Reduced cost
• Fast
• Customer oriented
ImageImage
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Front end loading
Front end loading
• Take time to do it right
Long termLong term
• Is the machine flexible
• Will operating costs be minimal
KPIKPI• As per
spec
OwnerOwner• Site
operator
Financial view Operational view
No alignment – different KPI’s
Communication breakdown
Where is Risk Management?
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Risk Universe Value Drivers
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Risk management ensures Value creation in one area does not destroy value in another
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Its not new
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Lessons Learnt
…. Or not
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The changing world of risk and opportunity….
…..and how much do we want to take
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A Business model to handle the dynamics
• Innovation
– Growing EBITDA
– Stainability of growth
– New products /markets
• Value creation
– EBITDA volatility stabilization
– Incident reduction
– Investment portfolio
• Quality
– Stability
– Resilience
– Efficiency
• Management
– A
– B
– C
• Business Process
– X
– Y
– Z
KPI’s
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Changing the viewpoint
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INSIGHT
INFORMATION
Reversing the mind:From the future to the past
Past
What happened?
(reporting)
Present
What is happening now? (real times
updates)
Future
What will happen ? (extrapolation)
• Managing in the “fix it” : culture of engineers
Future
What is the best/worst that can happen?
(prediction, simulation)
Present
What is the next best action?
(recommendation)
Past
How and Why did it happen?
(Rex , experimental design)
• Managing in the proactive: culture of entrepreneurs
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The value of Risk Management:
The life of PI
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Performance & Risk:
Management of a Performance Indicator
3 business processes to improve performance :
1. Process stabilization / reliability
2. Continuous Improvement / Capex Investment (Value plan)
3. Risk Management – through vulnerability22Copyright © ArcelorMittal 23/06/2017
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performance bridge
concept:An heavy industry Ebitda is generated
by important drivers not in control of
Management as input prices,
exchange rate or partially selling
prices ….
…. The role of Management is to
create task of projects (Value Plan) on
top of “business as usual” (stability)
on the drivers they could have an
impact on …..
….. However Management manage
what they know ignoring of course
what they do not know …
…. Unplanned events (incidents)
happen, negatively impacting the
overall profitability …
…. Therefore Management has to do
RM extending their knowledge
beyond the actual reality to a
probabilistic view on what could
happen, in order to mitigate Ebitda
losses
Value Plan and Risk ManagementOperational Performance Bridge /project Performance Bridge
130 131
599
-
-
80
-
-
--
1
210 -
48 7
155
128
FY12Actual (*)
2013 Nonrecurrent
FY13Normalized
Margin Steel Operationallosses
Usage/Performance
Fixedcosts
ValuePlan
Stock variation/Others
FY13Actual
Real Operational Performance
1: Unplanned events1: Unplanned events
XX
2: process stability2: process stability3: Value plan : business
opportunities
3: Value plan : business
opportunities
0
10
20
30
40
50
60
70
80
Process
stabilization
(reliability/)
Value Plan
Operational Risk
Management
OPERATIONAL PERFORMANCE BRIDGE
23
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Can you help?
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Lets help each other
Some common issues to discuss
Information• Optimal use of packages
– Managing interface
• Clarity of default settings
• Understanding of contingency risk
• Where do we/you need to improve?
• When should an exit strategy be
discussed– Go/no-go
• Your lessons learnt– Not only the good projects
• When is closed really closed?
Risks• Loss of Knowledge
• Loss of Experience
• Risk Dynamics fast and faster
• Variance – increasing volatility– Stress test the project to see viability
• Global Risk Adverseness– Ie willingness to take no risk
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What is the framework we
need to work together?
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26Copyright © ArcelorMittal 23/06/2017